1. Financial Statements and Cash Flows

2. Source of Information Annual Reports Wall Street Journal Internet:
NYSE (
NASDAQ (
Yahoo/Google Finance
Morningstar (
SEC-EDGAR
Financial Statements and Cash Flows

3. Financial Statements (1) Balance Sheet (2) Income Statement
Financial Statements and Cash Flows

4. Financial Statements-Balance Sheet (B/S)
It reports a company’s assets, liabilities, and shareholder equity at a specific point in time
Assets = Liabilities + Shareholder’s Equity
Nike, Inc. (NKE)
Financial Statements and Cash Flows

5. Nike, Inc. Balance Sheet
Financial Statements and Cash Flows

6. Important Rules in B/S
The assets are listed in order by the length of time it would normally take a firm with ongoing operations to convert them into cash.
Clearly, cash is more liquid than property, plant, and equipment.
Liquidity:
It refers to the ease and quickness with which assets can be converted to cash – without a significant loss in value.
Current assets are the most liquid.
The more liquid a firm’s assets, the less likely the firm is to experience problems meeting short-term obligations.
Liquid assets frequently have lower rates of return than fixed assets
Some fixed assets are intangible.
Debt versus Equity:
Creditors generally receive the first claim on the firm’s cash flow.
Shareholder’s equity is the residual difference between assets and liabilities.
Value versus Cost
Under Generally Accepted Accounting Principles (GAAP), audited financial statements of firms in U.S. carry assets at cost, i.e., historical cost. The numbers in B/S are called “Book Value.”
“Market Value” is the price at which the assets, liabilities, ad equity could actually be bought or sold.
Market Value and Book Value are completely different.
Financial Statements and Cash Flows

7. Financial Statements-Income Statement(I/S)
It measures financial performance over a specific period of time.
Three important parts:
(i) Operations
(ii) Non-operating (financing)
(iii) Taxes
Nike, Inc. (NKE)
Financial Statements and Cash Flows

8. Nike, Inc. Income Statement
Financial Statements and Cash Flows

9. Nike, Inc. Income Statement-Operations
The operations section of I/S reports the firm’s revenues and expenses from principal operations
Financial Statements and Cash Flows

10. Nike, Inc. Income Statement-Non-Operating (Financial)
The non-operating section of the I/S includes all financing costs (revenues), such as interest expense
Financial Statements and Cash Flows

11. Nike, Inc. Income Statement-Taxes
Usually a separate section reports the amount of taxes levied on income
Financial Statements and Cash Flows

12. Nike, Inc. Income Statement-Net Income
Net Income (Earnings) is the “Bottom Line” item
Financial Statements and Cash Flows

13. Discussion: How important is the I/S?
Earnings:
“excessive emphasis being laid on the reported earnings -- which might only be temporary or even deceptive.” Benjamin Graham
Financial Statements and Cash Flows

14. Discussion: How important is the I/S?
Gross Profitability
Trend in Gross Profitability
Operating Profitability
Financial Statements and Cash Flows

15. Important Rules in I/S GAAP: Non-Cash Items
The matching principle of GAAP dictates that revenues be matched with expenses.
Thus, income is reported when it is earned, even though no cash flow may have occurred.
Non-Cash Items
Depreciation is the most apparent. No firm ever writes a check for “depreciation.”
Another non-cash item is deferred taxes, which does not represent a cash flow.
Thus, net income is not cash.
Financial Statements and Cash Flows

16. One more concept: Working Capital
Working Capital (WC):
Capital (or money) required for firm to do daily business activities
Working Capital= Current Assets – Current Liabilities
Working Capital grows with the firm.
Change in Working Capital (ΔWC)
∆ WC t = WC t − WC t−1
Financial Statements and Cash Flows

17. Nike, Inc.-Working Capital
WC(2019)= CA(2019) - CL(2019)
= 16, ,866
= 8,659
WC(2018)= CA(2018) - CL(2018)
= 15, ,040
= 9,094
ΔWC(2019)= WC(2019) - WC(2018)
= 8, ,094
= -435
This decrease of $435 million is available to shareholders
Financial Statements and Cash Flows

18. (1) Operating Free Cash Flows (OFCF)
This is the cash flows generated by a company’s operating activities and available to all who provided capital to the firm (Debt and Equity Holders).
To value the whole firm and Capital Investments (later in the class)
OFCF=EBIT+Dep.−Taxes − CAPEX − ∆WC
EBITDA
Change in LT Assets
Change in WC
Operating Cash Flows (OCF)
Financial Statements and Cash Flows

19. (2) Free Cash Flows (FCF)
“Free” cash flows to equity (stock holders), which is derived from after operating free cash flows have been adjusted for debt payments (interest and principal
Stock Valuation
FCF= NI + Dep. − CAPEX − ∆WC − ∆LT Debt
Change in LT Assets
Change in WC
Change in LT Debt
Financial Statements and Cash Flows

20. OCF, OFCF, and FCF of Nike, Inc.
EBIT = 4,772
Depreciation = 720
Taxes = 772
OCF=4, =4,720
OFCF
OCF=4,720
CAPEX=LT Asset (2019) – LT Assets (2018) + Depreciation = 7,192 – 7, = 510
ΔWC=WC(2019) – WC(2018) = -435
OFCF = 4,720 – 510 – (-435) = 4,645
FCF
NI = 4,029
CAPEX = 510
ΔWC = -435
ΔLT Debt = LT Debt (2019) – LT Debt (2018) = 6,811 – 6,684 = 127
FCF = 4, – 510 – (-435) = 4,801
Financial Statements and Cash Flows

21. Thanks!
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